Algeria’s cabinet has approved draft amendments to the Money and Credit Law intended to allow the country’s central bank, Banque d’Algerie, to provide funds to the state treasury to cover a budget deficit which ballooned to a record $33bn last year. This followed the collapse in hydrocarbons revenue, the source of some 40% of budget revenue in 2017, and a whopping 95% of export earnings, to $27.1bn last year from $71.4bn in 2011.
The amendments, part of a “crisis plan” for which recently-appointed Prime Minister Ahmed Ouyahia will seek parliamentary approval on 17 September, were adopted at a 6 September cabinet meeting chaired by President Abdelaziz Bouteflika. The plan is being presented as an amendment to Algeria’s 2016-19 economic strategy adopted in July 2016 and formally unveiled in April 2017 (MEES, 5 May).
According to a statement issued by the president’s office, the amendments “will authorize the central bank to lend directly to the public treasury so that the latter finances the state budget deficit, internal public debt, and provide resources for the National Investment Fund.” This “exceptional financing” will be applied for a period of five years, and will be accompanied by a program of structural and economic reforms, which aim at restoring a balance in public finances and in external trade, the statement adds.
Algeria has turned to “unconventional” internal financing “after resisting for three years the effects of a severe financial crisis caused by a steep fall in hydrocarbon prices,” the statement says. This follows a June diktat from President Bouteflika that the government find a way to bridge the country’s gaping deficit whilst maintaining “external economic independence.”
Algeria has long had a strong isolationist foreign policy streak, one manifestation of which is an extreme aversion to foreign debt. The latest statement flags up as a badge of pride that Algeria has paid off all foreign debt. Previous prime minister Abdelmajid Tebboune had attempted to follow a more pragmatic course, possibly why his tenure lasted only six months before his dismissal in August. His replacement, part of a broader political shake up, has signaled a return to hardline financial isolationism (MEES, 25 August).
Veterans Minister Tayeb Zitouni said in a 19 August speech given in the name of the ailing Mr Bouteflika that Algeria must maintain its “economic sovereignty” at all costs, whilst Mohamed Arkab, the freshly-installed head of state power firm Sonelgaz, this week said he “totally rejected” any recourse to external debt to fund capital programs (MEES, 15 September).
Former Sonelgaz CEO Noureddine Boutarfa, who was subsequently promoted to energy minister before being unceremoniously sacked (MEES, 9 June), had had the temerity to state the obvious – that for Sonelgaz to bridge its $10bn funding gap, external fundraising would be needed (MEES, 26 February, 2016).
Even the IMF has slammed Algeria’s conservatism. Noting that Algeria has next to zero foreign debt, the Fund recommends that Algeria take advantage of record low interest rates to borrow and invest in infrastructure to lay the groundwork for future growth (MEES, 30 June).
The lack of recourse to alternative funding means the country’s reserves have been trashed. The Fonds de Regulation des Recettes (FRR), a reserve fund intended for counter-cyclical spending, has been empty since February, whilst the country’s foreign currency reserves have collapsed from $179bn at end 2014 to just over $105bn at end-July. The IMF projects further falls to $79bn by end-2018 and $55bn by 2020 (see chart). In a further indication of the ‘self-sufficiency’ mindset, state news agency APS, in announcing the July figure last week, chose to stress what it sees as the positive: that the reserves have (so far) enabled “Algeria to remain economically sovereign at the external level.”
The combination of a refusal to countenance foreign borrowing and an extreme reliance on oil and gas revenue means that, as its reserve funds have been depleted, Algeria – which through 2015 and 2016 had been praying for a rebound in oil prices – was forced to take an ax to much-needed capital spending in the 2017 budget.
The 2017 budget set out plans to cut the deficit by two-thirds to $11bn based on an eye-watering 23% cut to spending in dollar terms, as well as a 25% increase in oil and gas export revenues (MEES, 14 October 2016). The revenue figures actually look doable: MEES forecasts based on actual first half 2017 trade figures and futures prices have oil and gas export revenues rising by 23.5% to $33.5bn for 2017 (MEES, 25 August). However, the first half import stats, down only modestly year-on-year, indicate that spending has not been reined in by anything like the budgeted figure. This is for the best, given that such a dramatic cut to spending is neither economically prudent nor politically wise given the country’s high youth unemployment and history of Islamist violence.
However, the ‘solution’ of seemingly conjuring up money out of thin air does not look too clever either. The irony is of course that the aversion to foreign debt is borne of conservatism. But, whilst the central bank will be able to raise some funds by extending bank loans, given the scale of Algeria’s deficits and (much needed) infrastructure spending plans the central bank’s “unconventional” moves at least in part imply printing more money, a course that is ultimately much more risky than raising funds externally at interest rates that are near historic lows. Inflation and currency devaluation are obvious initial risks, but ultimately, for a country that prides itself on not having borrowed from the IMF in almost 20 years, the country’s financial independence could also be threatened.